Bloomberg News

Wind Surge Saps Bondholder Hope for Energy Future Payout: Energy

August 29, 2013

For the first time, Texas is connecting most of its wind farms to its largest cities. That’s bringing cheap electricity into the service area of Energy Future Holdings Corp., bad news to holders of $32 billion of the power company’s debt from the biggest-ever leveraged buyout.

What began as a trickle of power to Dallas and Austin from competitors’ windmills in West Texas has started flooding the market. The supply uses new transmission cables being stretched about 3,600 miles (5,800 kilometers) across the state in a $6.8 billion project set to be fully built by December.

Subsidized wind power together with natural gas that’s plentiful from shale drilling are curbing profit at Energy Future’s atomic and coal-fed power plants. That’s eroding value to banks and investors in the event of a bankruptcy. Creditors may have to fight over a shrinking pie of profit at the company formerly known as TXU, which was taken private for $48 billion.

“The transmission is finally there in Texas to bring all the wind power to the population centers and it’s a disaster for the generation companies,” Andy DeVries, an analyst at CreditSights Inc., said in a telephone interview.

Traditional power companies across the U.S. and Europe are struggling to compete in wholesale markets with newer generators supplying subsidized wind and solar energy. In Texas, wind has more than doubled in the past six years and now makes up 13 percent of the state’s generation capacity.

Market Upheaval

In the U.S., hydraulic fracturing techniques used to drill shale have produced a flood of cheap natural gas. That, combined with the growth in wind and tepid customer demand, is upending power markets, leading to plant closures and bankruptcy for some generator owners.

Most vulnerable for Dallas-based Energy Future is its Luminant generation unit, which saw the glut of cheap wind power and milder weather help drive prices down 20 percent in July from a year earlier. Depressed electricity rates deflate Luminant’s value and reduce what creditors may recover in a bankruptcy, Peter Thornton, an analyst for KDP Investment Advisors Inc., said by phone.

While Energy Future’s Oncor Electric Delivery utility is the main partner in the transmission line project, and will share in earnings for transmitting wind power, the parent company said Oncor would be excluded from any insolvency proceeding.

Moving Money

“It’s taking money from one side of the company and giving it to another,” DeVries said. “Unfortunately, you are taking it from the side that needs the money.”

The Texas transmission line build-out is an example of how companies that bolster the power grid may be best-positioned to survive the transition to a decentralized network where customers use more renewable power and rely less on large centralized fossil fuel and nuclear generators.

Energy Future, the biggest power producer in Texas, said in April and again this month it’s held talks with creditors and is evaluating changes to its capital structure (TXU:US) that may include filing for Chapter 11 for most of the company. Oncor won’t be part of its parent’s bankruptcy filing and has set up protections from creditor claims, Fitch Ratings said in an Aug. 12 research note.

Energy Future spokesman Allan Koenig declined to comment on the impact of power prices on the company’s valuation.

Bankruptcy Record

The restructuring would be the largest in the energy sector and the seventh-largest on record since 2000, according to data compiled by Bloomberg. Energy Future was taken private by KKR & Co. (KKR:US) and TPG Capital six years ago in the largest leveraged buyout in history.

Texas Competitive Electric Holdings’s $1.83 billion of 10.25 percent notes due November 2015 traded at 5.5 cents on the dollar Aug. 26, down from 30.5 cents on Jan. 2, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Oncor will get a boost in cash flows as the power line project is completed and it earns a return on the investment, Chairman and Chief Executive Officer Robert Shapard said during an Aug. 2 call with investors.

At the same time, Energy Future, NRG Energy Inc. (NRG:US) and Calpine Corp. (CPN:US) -- the three biggest owners of electricity plants in Texas -- all reported lower adjusted second-quarter earnings for their generators in the state as the cheap power supplied by government-subsidized wind turbines helped lower prices.

Average wholesale electricity rates in July dipped to the lowest since 2004, based on data compiled by Bloomberg.

Falling Prices

Electricity prices for 2014 also have fallen. The on-peak North Texas power price for next year has dropped 19 percent since reaching a peak on May 23, according to data compiled by Bloomberg.

During a heat wave in the first week of August, ample wind supplies served to keep a lid on prices that would’ve normally spiked from the higher demand, NRG Chief Executive Officer David Crane said during a call with investors on Aug. 9.

“Wind energy reduces electricity prices and that is good for consumers,” said Michael Goggin, an analyst for the American Wind Energy Association, an industry trade group. “Wind energy has no fuel costs, allowing it to replace more expensive and polluting sources of energy.”

Once complete, Oncor’s power lines will be part of a system that can eventually deliver about 18,500 megawatts of wind power, nearly double the amount now available in Texas and 25 percent of the state’s current generation capacity.

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net.


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